Gold ETFs have pulled back following the release of the minutes of the December Federal Reserve meeting. The news triggered a sell-off of US Treasury bonds and gold on concerns that the Fed’s bond purchase program could end sooner than expected.
The market’s reaction in selling gold seems exaggerated because the statement accompanied a further expansion of monetary policy and also indicated that there are downside risks to growth. With other central banks also continuing to flood financial markets with cheap liquidity (ECB, Bank of Japan, and potentially more from the Bank of England with a new governor in 2013), global monetary policy continues to be supportive of gold in particular. [Gold ETFs Fall After Jobs Report]
Currency debasement by the US and major developed economies is likely to continue until their long-term structural debt issues are resolved. This process could take years and will likely involve reducing real debt burdens through higher inflation. Therefore, while cyclical growth pick-ups may cause short-term pauses in debasement policies and the gold price rally, until real debt burdens are reduced, gold should remain in a structural bull market.
Precious metals ‘fiscal cliff’ rally overshadowed by FOMC minutes
Precious metals staged an early 2013 rally following the fiscal cliff deal but could not hold the gains after the FOMC minutes were released.
Concerns over US debt levels are likely to remain in focus as negotiations will now switch to the US debt ceiling issues which must be resolved in the coming weeks in order to avoid a debt default by the US government.
Gold rallied by 28% in July and August 2011 as deliberations over the debt ceiling at the time faltered.
Reserve Bank of India backs introduction of gold-linked financial products
India’s current account deficit has long been a source of concern for policymakers, and the government has estimated that around 80% of the deficit is the result of gold imports.
While the government is widely expected to introduce additional taxes for gold imports, the Reserve bank of India (RBI) has indicated that financial innovation could also be of assistance.
The RBI has said that given the strong demand for gold in the country, the development of gold-linked products may help reduce demand for physical gold as investors will be able to access gold returns through financial products as an alternative.
Key events to watch this week
The ECB meeting will be watched closely by investors to assess the likelihood of further monetary easing by the central bank.
Industrial production data coming from Germany and UK will also be watched closely as will US earnings results and continued news flows on the budget and debt ceiling debate.
ETFS Physical Swiss Gold Shares (SGOL)